Taxes & Spending

Bush Goes to War for Tax Cuts

This week, President Bush proposed an economic stimulus plan-aimed at getting the American economy on a higher economic growth trajectory-that conservatives can enthusiastically embrace.

In announcing the $630-billion, 10-year tax cut plan, President Bush declared that he would not “cave in to class warfare rhetoric” from the Democrats. Bravo.

If President Bush can secure the votes needed to pass this bold Reaganite package of tax-rate reductions, it will almost surely help the flagging stock market and the ailing economy and therefore nearly guarantee his re-election in 2004. The stakes are that large.

Predictably, Democratic leaders Nancy Pelosi (Calif.) and Tom Daschle (S.D.) indignantly shouted “tax cuts for the rich” in response to the Bush economic package. The Democrats’ alternative growth plan is oriented toward expanding government, but little else. The Democratic plan would increase government spending for the unemployed, increase government spending for the states, and provide another ill-conceived tax rebate-an economic strategy that has been tried and failed in recent history by Presidents Ford, Carter and, last year, by President Bush.

By expanding the government, the Pelosi-Daschle plan would actually rob private businesses and workers of economic resources and therefore de-stimulate the American economy. The plan only reinforces the suspicion that modern-day Democrats have become so addicted to big government that they are clueless about the factors that cause 21st Century economies to grow and prosper.

The first version of the Bush economic plan met with antagonism from many conservatives-but fortunately, the Bush economic team fixed the plan to accommodate stronger economic growth measures. The first version of the plan would not have reduced the top income-tax rates and would have only partially eliminated the dividend tax. Fortunately, the White House followed the advice of Vice President Cheney, who is increasingly the strongest voice of economic reason in the White House hierarchy. Cheney echoed the concerns of many supply side conservatives that any economic stimulus plan must cut the highest tax rates, because those taxes are paid predominantly by small business owners, and thus America’s job and wealth creators.

The new bolder and more ambitious $630-billion plan contains the right fiscal medicine at the right time. The weak economy has led to a fiscal crisis in the states and cities, has resulted in a two-year bear stock market with losses of over $7 trillion, and a rise in unemployment. Workers, investors, states and cities are all front-line victims of anemic growth rates of late.

The centerpiece of the President’s plan is elimination of the double taxation of dividends. Currently, dividend income is taxed as corporate income to the business, and then as personal income to the individual receiving the dividend. This can result in effective tax rates on dividends as high as 70%. These punitive tax rates, in turn, reduce stock values, capital investment, and savings.

Dr. John Rutledge, a senior economist in the Reagan Administration and now president of Rutledge Capital, explains the benefit of the dividend tax cut: “A dividend tax cut would raise the after-tax return on dividend paying assets above that on all other assets.” He believes that this dividend tax reduction plan would raise stock values by anywhere from 5 to 30% depending on the industry and the propensity to pay dividends.

Another top-notch economist, Gary Robbins of Fiscal Associates, says that a dividend tax cut will increase GDP by at least $5 for every $1 of reduced tax receipts. That’s an extremely high economic pay-off.

The other major feature of the Bush tax stimulus plan is to fast forward the tax cuts from the President’s original 2001 plan. This, too, makes good economic sense.

Phasing in tax cuts is always counterproductive if you want to stimulate the economy today. Would you go to the store today to buy a product if the store advertised that tomorrow the price will be marked down by another 20%? Delayed tax cuts delay economic activity and often have exactly the opposite impact as hoped. They de-stimulate the economy.

The rhetoric from the Democrats about curtailing the Bush tax cuts-which has become Holy Gospel to the Seven Democratic Dwarfs who are running for President-only serves to ensure that tax cuts will not juice the economy in the near term. Again, using an analogy helps: Would you buy a car with the promise of zero financing if the dealer was threatening to change the terms of the deal and charge high interest payments next year? That is what Tom Daschle threatens nearly every day.

President Bush would accelerate his earlier tax cut. I would prefer to see the entire 2001 Bush tax cut made effective immediately. A majority of House and Senate members voted for the tax cut two years ago. Why not provide the full economic bang of the tax cut now, when the economy most desperately needs a shot of steroids?

The idea behind this plan is to replicate the supply-side tax cut successes of Presidents Reagan and Kennedy. It was JFK who said, “It is a paradoxical truth that when tax rates are too high the economy will never produce enough jobs or enough revenues to balance the budget.”

Deficit hawks in both parties will no doubt squeal that this tax plan is unaffordable and will run up the national debt. They are wrong. What Kennedy and Reagan and now George W. Bush understand clearly is that it is the absence of economic growth that causes runaway budget deficits.

To be sure, there are some features in the Bush economic plan-no doubt meant to appease moderate Rockefeller Republicans and some of the centrist Democrats-that are ill-conceived. President Bush would, for example, also provide a tax rebate, failing to learn the lesson that to stimulate jobs and growth you must cut the tax penalty on future economic activity, not past economic activity.

President Bush also would provide billions of dollars of additional federal aid to states and cities. The only way that Washington can truly help the bankrupt states and cities, however, is by jump-starting the national economy, not by giving handouts. In the 1980s, the Reagan tax cuts created a massive revenue windfall for state and city budgets as the economy grew at a torrid pace. States and cities are major beneficiaries of pro-growth tax cut policies.

The President’s plan, and the Democratic plan as well, would re-introduce a failed Nixon-era program called federal revenue sharing, which had the feds shell out tens of billions of “free” dollars to states that were spent on wasteful programs. Revenue sharing was such a colossal failure that even Democrats in the 1980s agreed that it ought to be done away with. It makes no sense for taxpayer in Texas to be paying for local services in Massachusetts, or for Colorado taxpayers to pay for fire fighting in Arkansas.

Moreover, the federal government is now $150 billion in debt. There is no revenue available to “share.”

A recent Cato Institute study shows conclusively that the fiscal problems of the states are a result of ten years of overspending, not a result of insufficient revenues. As Colorado Republican Gov. Bill Owens says: “States do not have a revenue problem, they have an overspending problem.”

Still, for the most part, the Bush tax plan deserves two enthusiastic thumbs up. Let’s hope this White House has learned the lesson from his first tax plan, which is that negotiating with liberal Democratic leadership to buy votes can so water down a tax bill that its economic value is rendered nearly inconsequential.

President Bush has laid down a line in the sand and has defined what pro-growth Republicans believe strategic and growth-oriented tax changes can do to help rally the stock market, generate jobs, improve business conditions, and reduce federal, state, and local budget deficits.

House Speaker Dennis Hastert (R.-Ill.) and Senate Majority Leader Bill Frist (R.-Tenn.) must move swiftly to pass this worthy legislation. Now is not the time for tax cut timidity. Across the country this past fall, Republican candidates in the House and Senate ran for office embracing the President’s tax cut and urging its acceleration and its permanence. Democrats ran against the tax cuts. Pro-growth Republicans won in almost every instance.

Let the class-warfare Democrats embrace small and impotent policy changes-changes that increasingly sophisticated investor-class voters will immediately identify as fraudulent. The obstructionist Democrats have announced that they intend to fight President Bush’s genuine GOP growth package and to wage all-out class-envy warfare. President Bush has 90 million investor-class Americans on his side who realize that tax rate cuts mean higher stock values and greater retirement security.

Republicans must not shrink from the battle. Bring on the fight.


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